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Novartis-Glaxo Asset Un-Swap A Sign Of Things To Come

(Bloomberg Gadfly) -- Asset swaps have been a big thing in pharma over the past few years. Now it's time for the un-swap.

Novartis AG on Tuesday said it was unwinding part of a complicated 2014 asset swap with GlaxoSmithKline PLC, trading its stake in their consumer-health joint venture for $13 billion.

The decision isn't a huge surprise, though the timing is unexpected. It suggests new Novartis CEO Vas Narasimhan won't be shy about dealing with the long list of decisions his predecessor left him. It also hints at sizable, pharma-focused M&A to come. The company would be well served by ambition on both fronts.

Novartis made two major deals under former CEO Joe Jimenez. One was the $12.2 billion acquisition in 2010 of the portion of eye-care giant Alcon it didn't already own. The second was the 2014 swap of its vaccines and $14.5 billion for Glaxo's cancer drugs and the consumer JV stake. Other drug deals under Jimenez were rather tiny.

The consumer exit is a signal pharma will be Novartis's focus under Narasimhan, a physician and the company's former head of drug development.

The pharma business could certainly use an M&A boost.

Novartis has a solid array of recently or soon-to-be approved medicines. But many of them -- notably Cosentyx, Aimovig, and Kisquali -- have multiple competitors. Gaining or retaining market share will be a bruising fight for these drugs. Heart drug Entresto, meanwhile, may never be a mega-blockbuster.

Reinforcements are on the way, including promising drug candidates for macular degeneration and multiple sclerosis. But Novartis also has a growing patent-expiration problem -- drugs that combined for more than $6.7 billion in sales last year face generic competition, or will soon. The company's pharma unit has the added burden of compensating for still-recovering eye-care business Alcon and a struggling generics unit.

Narasimhan should invest in some extra insurance against a competitive environment and the chance of pipeline disappointment.

The Glaxo un-swap came at a nice valuation, but could have fetched an even higher price later if the JV's margins had continued to improve. The fact that Narasimhan was willing to pull the trigger anyway is an encouraging sign of decisiveness and of his commitment to refocusing around pharma.

His work isn't done. Novartis in October said it would delay a long-considered possible spin-off of Alcon until the first half of 2019, hoping for further margin improvement. It had hinted at a similar strategy for its Glaxo JV before expediting the un-swap; perhaps the Alcon decision could be sped up as well.

The $13 billion Novartis gets from the Glaxo deal will go a long way toward funding pharma M&A. The proceeds from an Alcon separation would further expand the realm of deal possibility.

Novartis's un-swap is an encouraging start to a needed transformation and priority shift for the company. Narasimhan has more momentum and wiggle room than most CEOs. He shouldn't waste them.

Correction: An earlier version of this piece misstated Aimovig's approval status.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.